Chapter 8 352

offshoring

the outsourcing of activities outside the home country

single-business firm

derives 95 percent or more of its revenues from one business

principal-agent problems and information asymmetries

Can lead to market failures, and thus situations where internalizing the activity is preferred

dominant-business firm

derives between 70 and 95 percent of its revenues from a single business but pursues at least one other business activity

firm growth

is motivated by the following: increasing profits, lowering costs, increasing market power, reducing risk, and managerial motives

It must support and strengthen a firm's strategic position, regardless of whether it is a differentiation, cost-leadership, or blue ocean strategy.

How does corporate strategy gain and sustain competitive advantage?

building new core competencies to create and compete in markets of the future.

In 2007, Salesforce.com recognized an emerging market for platform as a service (PaaS) offerings and developed a new competency in delivering software development and deployment tools. This allowed its customers to either extend their existing CRM offering or build completely new types of software. This is an example of

conglomerates

The Tata Group, Warren Buffet's Berkshire Hathaway and the Japanese Yamaha group have several strategic business units under one corporate umbrella and are pursuing an unrelated diversification strategy. We would refer to these businesses as

increasing costs, reducing quality, reducing flexibility, and increasing the potential for legal repercussions

What are the risks of vertical integration?

securing critical supplies and distribution channels, lowering costs, improving costs, improving quality, facilitating scheduling and planning, and facilitating investments in specialized assets

What the benefits of vertical integration?

When the costs to pursue an activity in-house are less than the costs of transacting in the market

When should firms vertically integrate?

increasing profits

are clearly related to enhancing a firm's competitive advantage

managerial motives such as increasing company perks and job security

are not legitimate reasons a firm needs to grow

"how to compete."

business strategy

increasing market power

can also contribute to a greater competitive advantage, but can also result in legal repercussions such as antitrust lawsuits

true

choices within a related diversification strategy can be related-con-strained or related-linked

"where to compete."

corporate strategy

1. industry value chain 2. products and services 3. geography (regional, national, or global markets)

corporate strategy concerns the boundaries of the firm along three dimensions:

Vertical Integration

denotes a firm's addition of value what percentage of a firm's sales is generated by the firm within its boundaries

industry value chain (vertical value chain)

depicts the transformation of raw materials in to finished products goods and services. Each stage typically represents a distinct industry in which a number of different firms compete

transaction cost economics

help managers decide what activities to do in-house ("make") versus what services and products to obtain from the external market ("buy").

strategic sourcing

involves moving one or more value chain activities outside the firm's boundaries to other firms boundaries to other firms in the industry value chain

forward vertical integration

involves moving ownership of activities closer to the end (customer) point of the value chain

diversification-performance relationship

is a function of the underlying type of diversification

taper integration

is a strategy in which a firm is backwardly integrated but also relies on outsidemarket firms for some of its supplies, and/or is forwardly integrated but also relies on outsidemarket firms for some distribution

information asymmetries arise when one party

is more informed than another because of the possession of private information

unrelated diversification

often results in a diversification discount: the stock price of such highly diversified firms is valued at less than the sum of their individual business units

related diversification

often results in a diversification premium: the stock price of related-diversification firms is valued at greater than the sum of their individual business units

a firm follows a related diversification strategy

when it derives less than 70 percent of its revenues from a single business activity but obtains revenues from other lines of business that are linked to the primary business activity

a firm follows an unrelated diversification strategy

when less than 70 percent of its revenues come from a single business, and there are few if any linkages among its businesses